# EUR-Lex - 52013DC0800 - EN

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# 52013DC0800

**COMMUNICATION FROM THE COMMISSION Annual Growth Survey 2014 /* COM/2013/0800 final */**

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COMMUNICATION FROM THE COMMISSION

Annual Growth Survey 2014

1. 
Introduction

The Annual
Growth Survey (AGS) takes stock of the economic and social situation in Europe
and sets out broad policy priorities for the EU as a whole for the coming year[1].
In so doing, it launches a new European Semester of economic policy
coordination, ensuring that the EU and its Member States co-ordinate their economic
policies and their efforts to promote growth and jobs. This year's guidance is
set against the background of several significant economic and policy
developments.

Firstly, the
economic forecasts just published by the Commission[2] confirm signs of a slow
recovery in the EU. After five years of very limited or negative growth, the EU
has experienced positive growth in the second quarter of 2013. The recovery is
expected to continue and to become more robust in 2014. Inflation is expected
to remain subdued. At the same time, as illustrated in the Alert Mechanism
Report[3]
published alongside this AGS, first signs of rebalancing of the EU
economy are visible and a number of important macro-economic imbalances are
being corrected.

We have reached
a turning point in the crisis but the incipient recovery is still modest and
fragile, and the global economic context presents uncertainties, such as
reduced demand in emerging economies. Risks linked to lack of confidence about
banking sector resilience and to high sovereign debt are still present. The
legacy of the crisis, deleveraging needs in the public and private sector,
fragmentation of financial systems and credit markets, sectoral restructuring
and adjustment and high levels of unemployment will continue to weigh on growth
in the coming period. Its impact will gradually subside as accumulated
macroeconomic imbalances are corrected. Improvements in the labour market will
take time to materialise, with unemployment expected to remain unacceptably
high in many parts of Europe for some time to come, and the broader social
situation remains depressed[4].The
duration and depth of the crisis has created hardship across Europe and
particularly in countries implementing adjustment programmes.

Signs of
economic improvements should thus be taken as an encouragement to pursue
efforts with determination, avoiding risks of fall-back, complacency or
"reform fatigue". The biggest challenge now is to keep up the pace of
reform to improve competitiveness and secure a lasting recovery. The gradual
recovery will underpin domestic demand which is expected to take over as the
main engine of growth. Fairness considerations and clarity about the goals to
be achieved will be essential to secure the lasting success, efficiency and public
acceptability of efforts at national and European level.

Secondly, this
AGS is published at the same time as new rules on the coordination of budgetary
policies in the Euro area are implemented for the first time in full. In
mid-October, 
all Euro area Member States, except those implementing a macroeconomic
adjustment programme, had to present draft budgetary plans for the coming year.
The role of the Commission is to review whether Member States are adopting the
necessary measures to achieve the objectives agreed at EU level, before budgets
are finalised at national level. The Commission's detailed assessment will be
published shortly.

In parallel with this strengthening of EU
economic governance, discussions on further developing
Economic and Monetary Union (EMU) are progressing, as advocated in the
Commission's Blueprint on a deep and genuine EMU[5]
and the four Presidents' report "towards a genuine EMU"[6]. The establishment of a Banking
Union, built on a strong common EU rulebook and a more effective regime for supervision
and resolution of banks, will be key to strengthening financial stability in
Europe. The Commission has also made proposals to strengthen the social
dimension of EMU[7]
and published consultative communications on the ex-ante coordination of major
economic policy reform plans[8]
and a convergence and competitiveness instrument[9].

Thirdly, 2014 will be the first year of
implementation of the new European multi-annual financial framework. In
addition to projects conducted jointly at EU level to boost Europe-wide
innovation and infrastructure, an investment capacity of more than EUR 400
billion will be mobilised to boost growth and jobs at national and regional
level through the European Structural and Investment Funds (ESIF). The
Commission has been discussing priorities with the Member States and is also
providing technical assistance to make sure operational programmes can start
rapidly. The new ESIF will support the goals of the Europe 2020 strategy and
will be used to support reforms identified in the EU country-specific
recommendations. For the first time the policy and the funding are being
brought together in what can be a very powerful driver of growth, provided
funds are concentrated on priorities.

Taken together, the combination of the
strengthened EU system of economic governance, the new EU multi-annual
financial framework and EU-level policies such as completing the Internal
Market and connecting Europe through physical infrastructure and pursuit of the
digital agenda, amounts to real progress in creating the EU-level framework
conditions for future growth in Europe. Member States should design their national
policies taking these EU level instruments fully into account. This will not
only enhance the impact of national policies but will also produce synergies at
EU level.

Against this background, the Commission
considers it crucial to stay the course of the policy response deployed in
recent years. While maintaining the same medium term priorities as last year,
the Commission is proposing to adapt their implementation to the changing
economic and social circumstances described above. The EU and its Member States
should thus pursue – and in some cases reinforce – their focus on making
progress in the following five priority areas, with varying degrees of emphasis
as described in the rest of this text:

§ 
Pursuing differentiated, growth-friendly fiscal
consolidation

§ 
Restoring lending to the economy

§ 
Promoting growth and competitiveness for today
and tomorrow

§ 
Tackling unemployment and the social
consequences of the crisis

§ 
Modernising public administration.

The order of this list does not reflect a
hierarchy of priorities. As this year's Annual Growth Survey demonstrates, the
top priority now is to build growth and competitiveness. The key challenge is
to build a lasting recovery.

Before developing these priorities further
the next section looks at the achievements to date of the European Semester and
highlights a number of areas where further political decisions are still
needed.

2. 
Deepening the European Semester

Launched in 2010, the European Semester is
the cornerstone of the EU's strengthened framework for
integrated coordination and surveillance of Member States' economic and
budgetary policies. This strengthened framework builds on the Stability and
Growth Pact provisions, as well as on the new EU tools to prevent and correct
macro-economic imbalances and covers the implementation of the Europe 2020
strategy for smart, sustainable and inclusive growth.

This framework has started to deliver results. A
close partnership is being built between the Member States and the EU
institutions, national procedures and timetables have been adjusted to enable
EU level policy co-ordination to take place in a predictable framework. As a
result, Member States have embarked on important
reforms, putting in place the right conditions for a return to growth. Further
detail on the implementation of country-specific recommendations is provided in
annex.

Substantial progress has been made on fiscal
consolidation. National fiscal frameworks have been significantly strengthened
through e.g. the establishment of independent fiscal bodies and the setting of
numerical fiscal rules and important fiscal reforms have been implemented in a
difficult economic environment. This has helped to stabilise the increase in
debt levels and improved financial markets' perception of the sustainability of
public finances, thus lowering sovereign bond spreads. This has also contributed
to preserving the integrity of the common currency and stabilising the
financial system.

Important measures have also been taken by
Member States to reform labour markets and enhance their resilience, combat
segmentation and promote labour market participation. A special focus has been
put on policies to reduce the unacceptably high levels of unemployment of young
people. Youth Guarantees are being put in place to ensure that all young people
under 25 receive a good quality offer of employment, continued education, an
apprenticeship or a traineeship within four months of leaving formal education or
becoming unemployed. However, given the time lag between reforms, economic
recovery and labour market performance, the employment situation will take time
to improve.

More needs to be done to improve the
functioning and flexibility of product and services markets, e.g. by
modernising network industries and further opening services sectors to support
growth and jobs. Most vulnerable Member States are implementing significant
reforms and in current account surplus countries, wage growth has become more
dynamic supporting internal demand. However, in several Member States, further
progress is needed in the implementation of structural reforms to assist in
creating the much needed investment opportunities that will help shift
resources towards the production of tradable goods and services, increasing
external competitiveness and boosting productivity. In some less vulnerable
Member States, reform efforts have been slower or even delayed and have been
less ambitious. In particular this is the case of product market reforms which
could improve competition in non-tradable sectors, spur investment and
facilitate the reallocation of resources to non-tradable sectors.

More generally, in terms of deepening the
European Semester as a process, there are a number of areas where further
improvements are needed if the EU's new economic governance is to deliver its
full potential. These include:

· 
Greater ownership at national level. National
policy making is being changed by Europe's new economic governance. There is a
need for national processes to take active account of this development,
including by stepping up interactions with the European level. In many Member
States, there is a need for greater involvement of national parliaments, social
partners and civil society in the process in order to secure public
understanding and acceptance of the necessary reforms. The Commission continues
to recommend that the National Reform Programmes (NRP) and Stability or
Convergence Programmes (SCP) be discussed with national parliaments and all
relevant parties, notably social partners and sub-national actors.

· 
Stronger co-ordination among the members of the
Euro area. The urgency of the crisis and time pressures have prevented the Euro
area so far from moving from the consideration of country-specific
recommendations to the consideration of policy measures and reforms that are
needed for the well-functioning of the common currency as a whole. As the
economy improves more time should be devoted to the ex ante co-ordination of
key economic policies in the Euro area. This AGS has identified issues relating
to productivity and competitiveness, weaknesses in labour and product markets
that should be tackled holistically by the Euro area – removing rigidities in
some Member States can create new opportunities for them and for all other
Member States.

· 
Better implementation of the country-specific
recommendations. Member States have the responsibility to decide on the policy
mix that suits their national systems best but they should also, particularly
those that share the Euro, take policy decisions that reflect the wider interests
of their fellow EU members. This means a responsibility for national
governments to realise that decisions in other countries are a matter of common
interest, and to engage openly in multilateral decision-making, within existing
institutional frameworks. In its EMU Blueprint[10]
and a subsequent Communication[11]
the Commission set out ideas on how quasi-contractual arrangements could, in
combination with funding designed to support the implementation of key reforms,
provide stronger incentives for implementation. It proposed that following
adoption of the country-specific recommendations, notably those under the macro-economic
imbalances procedure (MIP), Member States would make proposals for contractual
arrangements. These would be voluntary under the preventive arm of the MIP and
mandatory under the corrective arm (where they would correspond to the
corrective action plan as set out in Regulation 1176/2011). The Commission also
proposed that the contractual arrangements would be accompanied by financial support
to help Member States to implement them more rapidly and more thoroughly than
would be possible without additional financial support.

The Commission considers that it is now
time to tackle the three areas described above in order to further enhance the
effectiveness of the economic governance arrangements. The European Council
meeting of October 2013 agreed to return to some of these issues at its
December 2013 meeting. The Commission will provide input for that meeting in
the form of principles that could be agreed and then developed in 2014.

3. 
Pursuing differentiated, growth-friendly fiscal
consolidation

Progress in fiscal consolidation is visible
over time. The latest figures show that fiscal deficits, in nominal terms, are
being reduced from 6.9% of GDP in 2009 to 3.5% in 2013 in the EU. In structural
terms – taking account of the
cyclical changes in the economic situation and net of one-off and other
temporary measures – progress over
the last year is in the order of 0.6 percentage point of GDP. Furthermore, debt
levels are expected to peak in 2014, decreasing from 2015 onwards. This, together
with other policy measures at EU and national level, has reduced pressure on
sovereign bond markets, and means in many cases that the pace of consolidation
can be moderated. Creating fiscal room for manoeuvre is also necessary in the
light of the rising costs associated with Europe's ageing population.

The process of consolidation is noticeable at
country level. A number of Member States have already reached sound budgetary
positions. At the same time, following Latvia more than a year ago, Ireland is
expected to exit its adjustment programme in December 2013, Spain will complete
its bank restructuring programme in early 2014 and Portugal will conclude its
adjustment programme in mid-2014. These examples show that well-targeted assistance
programmes can help countries successfully return to the markets and sustain
their financial needs.

Notwithstanding progress in returning to sound
public finances, debt levels in most of the Member States remain high. This is
why it is crucial to stay the course of the growth friendly, differentiated fiscal
consolidation strategy that has been advocated by the Commission. As the
remaining consolidation needs are now lower, the negative impact on growth
should also be reduced. The overall improved fiscal and financial situation,
which reduces the urgency of policy measures, will enable Member States to
better design consolidation programmes and pay increased attention to their
quality and composition as well as to the influence of fiscal policy on growth,
public sector efficiency and social equity. While expenditure-led consolidation
should be favoured the focus should be on an overall efficient and growth
friendly mix of expenditure and revenue measures. Moreover, consolidation
measures should be complemented by further measures to strengthen growth
potential as strong economic fundamentals are needed to underpin fiscal
sustainability.

For countries with relatively high tax rates,
reductions in the levels of expenditure or a broadening of the tax base and the
removal of ill-targeted exemptions, instead of tax rate increases, are
effective ways of securing public finances without hindering growth potential. For
Member States with greater fiscal room for manoeuvre, the Commission recommends
measures to stimulate private investment and consumption and growth-friendly
public investment, while remaining in line with the Stability and Growth Pact.
Such measures include for instance more efficient public spending including by
modernising public administrations, giving priority to public spending that
reinforces economic growth potential, tax cuts and reductions of social
security contributions. This should also help the rebalancing of the EU economy.

In terms of expenditure, Member States need to find ways to protect or
promote longer term investment in education, research, innovation, energy and
climate action. Particular attention should also be
paid to maintaining or reinforcing the coverage and effectiveness of employment
services and active labour market policies, such as training for the unemployed
and Youth Guarantee schemes. At the same time, there is a
widespread need to strengthen the efficiency and financial sustainability of
social protection systems, notably pensions and healthcare systems while
enhancing their effectiveness and adequacy in meeting social needs and ensuring
essential social safety nets. In many countries, pension reforms should be
completed by linking statutory retirement age to life expectancy more systematically.

In terms of revenues, tax levels have
increased as a result of the crisis. Tax systems should be redesigned by
broadening tax bases, and shifting the tax burden away from labour on to tax
bases linked to consumption, property and pollution. Environmentally harmful
subsidies should be reduced. Tax compliance should also be improved through
fighting tax fraud and tax evasion, coordinated action to tackle aggressive tax
planning and tax havens, by ensuring greater efficiency of tax administration
and simplifying tax compliance procedures.

The Commission's assessment of the draft national
budgetary plans for 2014 confirms the determination of the Member States to
pursue the pace of fiscal consolidation, in line with the country-specific
recommendations. It is also encouraging to see that, as part of the new EU
rules, national fiscal frameworks have been reinforced, with economic forecasts
and budgetary figures now subject to independent reviews. As a result, Member
States'  forecasts are more in line with those of the Commission and
international organisations such as the IMF and OECD. This enhances the
credibility and transparency of national and EU decision-making.

The Commission
has identified the following priorities:

Fiscal
consolidation should be a growth-friendly mix of expenditure and revenue
measures, putting more emphasis on the quality of public expenditure, and the
modernisation of administration at all levels. Where greater fiscal room for
manoeuvre exists, private investment and consumption should be stimulated, for
instance through tax cuts and reductions of social security contributions.

Longer term
investment in education, research, innovation, energy and climate action should
be protected and the needs of the most vulnerable in our society should be
catered for.

Tax should
be designed to be more growth-friendly, for instance by shifting the tax burden
away from labour on to tax bases linked to consumption, property, and combatting
pollution.

4. 
Restoring lending to the economy

The signs of improvement in financial conditions
detected last year have become more solid and financial markets have proven
relatively robust. However, risks remain and lending conditions for businesses
are far from being normalised.

Moreover, financial market fragmentation has
led to very divergent interest rates for loans to businesses and households across
the EU, with rates that are twice as high in some Member States than in others,
and loan volumes and financing possibilities differ widely among potential
borrowers depending on their location. According to an ECB survey[12] on the access to finance of
SMEs, 85% of German SMEs that applied for credit in the second half of 2012
received the full amount but the average for southern European countries was
just over 40% and only 25% for Greece. Such differences in access to credit
cannot be explained only by differences in prevailing economic conditions.

Making sure the banking sector functions
correctly in providing finance for productive activity is essential to
sustaining economic recovery. Much has already been done to improve bank
regulation and supervision, and the banks themselves have acted to restructure
their balance sheets and raise capital to meet new standards.[13] However, the on-going process
of balance-sheet repair in the banking sector, which plays a dominant role in financial
intermediation, partly explains Europe's more limited ability to rebound after
the crisis. In the process of repairing bank balance sheet, the onus is on the
banks to find private sector solutions with access to public funds only as a
last resort. In this context, the new state aid guidelines of the Commission
provide for an appropriate level of burden sharing with bank shareholders when
banks have to be recapitalised with public means.

Important and necessary steps have been
taken at EU level to set adequate framework conditions and restore lending to
the economy. The completion of a fully-fledged Banking Union is the core
element of the EU response. It is essential not only for the stability of the euro
area, but also for the functioning of the single market and overcoming the
increasing fragmentation of financial markets. The recent agreement on a single
supervisory mechanism for banks was a first big step towards Banking Union. It
is essential to make the next step by agreeing on a single resolution mechanism
and fund. To prepare the transfer of the supervision mandate to the ECB, a
comprehensive assessment has been launched to enhance transparency regarding
the health of banks' balance sheets, identify and repair any remaining
weaknesses, and so improve market confidence. This should help to accelerate
the process of balance-sheet repair and lay the conditions for a strong and
sustainable resumption of credit growth. Beyond the banking sector, households
and companies in many Member States remain over-indebted as a result of the
crisis and still need to complete their financial deleveraging.

Specific measures have also been taken at
EU level to facilitate access to finance for SMEs[14]. With the support of the
European Structural and Investment Funds (ESIF), the amount of funding
available through leverage-based financial instruments for SMEs should double
on average for the period 2014-2020 compared to the period 2007-2013, helping
in particular countries where financial conditions remain tight. Moreover, the
Commission and the EIB are working to expand joint risk-sharing financial
instruments to leverage private sector and capital market investments in SMEs,
which should become operational in January 2014.

Priorities at
national level will vary from country to country. Closer monitoring of private
debt and associated financial risks, such as real estate bubbles, is necessary
in a number of countries. This includes reducing the corporate tax bias towards
debt financing and reviewing aspects of tax schemes which increase the debt
bias of households, typically through tax relief for mortgages, as well as improving
corporate and personal insolvency regimes[15].
New forms of financing should be promoted as alternatives to bank financing,
such as options for venture capital, development of SME bonds and alternative
stock markets[16].

The Commission
has identified the following priorities:

Restructuring
and repair of banks: this includes adopting and implementing the Banking Union
swiftly as well as strengthening the capacity of banks
to manage risks in line with the new rules on capital requirements and
preparing for the asset quality reviews and stress tests.

Developing
alternatives to bank financing, including options for venture capital,
development of SME bonds and alternative stock markets.

Close
monitoring of private debt levels and associated financial risks, such as real
estate bubbles, and the impact of corporate and personal insolvency regimes,
where necessary. This also includes schemes creating a tax bias towards debt
financing.

5. 
Promoting growth and competitiveness for today and
tomorrow

Important restructuring is taking place
across Europe as a result of the crisis. As companies and households shed
excessive debt and production factors move to more productive sectors of the
economy, growth is returning. The driver for growth is moving from external to
internal demand too. At the same time, it is becoming clear that its
composition will be – and needs to be – different from ten or just five years
ago. Moreover, globalisation and technological progress are steering further
changes. Recovery in Europe does not mean getting back to "business-as-usual";
it means finding new sources of growth and competitiveness for the longer term,
with knowledge-intensive and high-productivity activities for our economy. This
is well illustrated by the increased integration of EU industries into global
value chains which will help strengthen Europe's industrial base and requires
open and interconnected product and services markets, investment in research
and innovation and an appropriately skilled work force.

Economic growth is currently still held
back in an important number of Member States by the high level of private
indebtedness. This means that firms have no room to invest in productive
activities and consumers are limited in what they can buy. Rigidities in labour
and product markets have hindered competitiveness adjustment, efficient
resource allocation and productivity growth and partly explain the divergence
in potential growth rates across Member States.

An important change is taking place in
countries which have engaged in deep structural reforms, with signs of an
emerging shift in economic activities from the non-tradable sector to the
tradable sector, in particular in the Member States which cannot use the
exchange rate instrument. This is exemplified by an increase in exports and
reduction of current account deficits in several countries. Such trends were
helped by adjustments to labour costs as part of a broader strategy to
reinforce the competitiveness and productivity of the economy. Improving the
export performance of individual countries is also supported by an ambitious
trade policy at EU level.

The country-specific recommendations
identify a number of product and service market reforms of priority to each
Member State, taking into account the need to sequence reforms according to
national situations, and stress the need to open services markets, for example
by screening regulatory restrictions including on access to regulated
professions. Completing the internal energy market by 2014 would play an
important role in helping to reduce energy costs and improving the
cost-effectiveness of support schemes for renewable energy. More can be done to
improve the efficiency of network industries, and boost innovation and
research. Increasing resource efficiency and reducing the EU's dependence on
external energy sources must be part of the EU's growth strategy. There are
divergences between Member States, for example in waste and water management,
which are holding back the considerable growth potential of the green economy. While
a number of these reforms may take time to produce their effect, their delivery
is essential to support recovery and boost Europe's growth potential.

The impact of such reforms greatly benefits
from the economies of scale of the European single market, supported by better
physical and digital connections and appropriate data protection[17] across the continent. Several
important work strands are currently being pursued[18]: an ambitious  implementation
of the Services Directive should boost domestic and cross-border supply and
demand; the Commission's proposals for a more integrated single market in the
telecommunications sector should be adopted as a matter of priority to boost
the sector and the development of online economic activities and deliver fairer
prices; the completion of the core TEN-T corridors, the enhancement of
cross-border connections as well as the upgrading of existing infrastructure,
the removal of restrictions on market access in particular in port and railway
services, will serve the integration and competitiveness of the logistics and
transport sector.

European research and innovation are held
back by fragmentation and inadequate framework conditions. There is not enough
collaboration between the public and private sectors. The inability to transfer
research results into goods and services and a growing skills mismatch are
particularly affecting knowledge intensive sectors. These negative trends can
be reversed by accelerating the reform of national research systems in line
with the proposed European Research Area. At the same time, new forms of
cooperation can boost Europe's lead in the world. The implementation of the new
EU-level research and innovation Horizon 2020 and COSME programmes will help
the development of EU public-private partnerships in the field of R&D and
support the modernisation of national innovation and research systems.

The Commission
has identified the following priorities:

Full
implementation of the third energy package in 2014, and improving the cost
effectiveness of support schemes for renewable energy. Promoting resource
efficiency by improving waste and water management, recycling and energy
efficiency.

Improving
the implementation of the Services Directive, including through the screening
of restrictions affecting access to regulated professions, and their
replacement where appropriate, with less restrictive mechanisms.

Accelerating
the modernisation of national research systems in line with the objectives of
the European Research Area.

6. 
Tackling unemployment and the social consequences of
the crisis

The social impact of the crisis is still
being heavily felt. Unemployment rates remain historically high, at 11% on
average in the EU (in July 2013), with a youth unemployment rate of 23.4%.
These rates vary widely across Europe leading to growing divergence in
employment and social outcomes between Member States. Given the time lag
between economic recovery and impact on employment, the situation is not
expected to improve rapidly and inequalities may rise. The crisis has had a
particularly negative impact on the most disadvantaged and the share of people
at risk of poverty has risen to 25% in the EU. This also includes a growing
risk of structural unemployment and increased exit from the labour market,
which could have significantly negative effects on EU growth potential.

Europe's labour market and social fabric
will take time to recover and needs reinvigorating as the economy emerges from
the crisis. The immediate priority should be given to ambitious implementation
and follow up of reforms regarding the functioning of the labour market so that
participation can be increased. This also includes boosting sources of jobs in
expanding sectors, maintaining the employability of the labour force including
the long term unemployed and the most vulnerable groups, including through
active support and training of the unemployed and making sure that social
safety nets fully play their role. In a context of an ageing labour force,
longer and more fulfilling working lives require adequate skills and lifelong
learning, enabling working environments, and also addressing the impact of
gender pay and activity gaps on women's pension entitlements. Access to
affordable care services will help the participation of women in the labour
market. Stronger involvement of social partners, in line with national practice
and tradition, are essential for the design and implementation of the policy
response.

Several important reforms have been adopted
by Member States to modernise their labour markets and promote enhanced labour
market participation. The positive impact of such reforms should become visible
as the macro-economic environment improves.

To stimulate job creation, action should be
taken to reduce the tax wedge on labour, as part of overall efforts to shift
the tax burden, in particular for low paid workers and young workers; to make
sure that wage developments should be in line with productivity and thus supportive
of both cost competitiveness and aggregate demand; continue to modernise
employment protection legislation to remedy persistent labour market
segmentation and to reinforce the fight against undeclared work. The greening
of the economy, the digital sector and health care services are areas that will
generate significant job opportunities in the years to come. There is a need to
develop strategic frameworks in which labour market and skills policies play an
active role in supporting the job creation in these sectors and anticipating
and adjusting to new patterns of growth. Labour mobility, including
cross-border, will benefit from the reinforced cooperation and from a
strengthened EURES-network, that will help firms and job-seekers find
opportunities in other Member States.

Action is also
needed to improve education and skills performance.  The EU is still lagging behind its 2020 targets on tertiary
educational levels and reducing early school drop-outs. Moreover, according to the
OECD, 20% of the EU workforce still has a serious lack of skills, including low
literacy and low numeracy skills. 25% of adults also lack the skills to
effectively make use of ICT. This creates bottlenecks and mismatches[19] for a number of jobs and
professions, and more generally reduces the capacity of the EU labour force to
adapt and progress in the labour market. It is essential to invest in the
modernisation of education and training systems, including life-long learning, in
particular dual learning schemes, and to facilitate the transition from school
to work, notably by increasing the availability of good quality traineeships or
apprenticeships. In this context, Member States should swiftly adopt Youth
Guarantee Implementation Plans, and related funding programmes (Youth
Employment Initiative and European Social Fund) should be finalised as soon as
possible.

Better performing social protection is
essential to support social change and reduce inequalities and poverty over
time. Active inclusion strategies should be developed,
encompassing efficient and adequate income support, activation measures as well
as measures to tackle poverty, including child poverty, and broad access to
affordable and high-quality services, such as social and health services,
childcare, housing and energy supply. The link between social assistance and
activation measures should be strengthened through more personalised services
("one-stop shop") and efforts to simplify and better target benefits
will help improving the take-up of measures by vulnerable groups and their
effectiveness.

The Commission
has identified the following priorities:

Stepping up
active labour market measures, notably active support and training for the
unemployed, improving the performance of public employment services and
implementing a Youth Guarantee.

Further reform efforts to ensure that wage developments should be in line
with productivity and thus support both competitiveness and aggregate demand,
to remedy labour market segmentation, notably by
modernising employment protection legislation, to support job creation in
fast-growing sectors and to facilitate labour mobility.

Pursuing
the modernisation of education and training systems, including life-long
learning, vocational training and dual learning schemes.

Improving
the performance of social protection systems, in particular by strengthening
the link between social assistance and activation measures through access to more
personalised services ("one-stop shop") and efforts to simplify and
better target benefits with particular attention to the situation of the most
vulnerable.

7. 
MODERNISING PUBLIC ADMINISTRATION

In the current climate, public administrations
across the EU face the challenge of delivering "better with less",
i.e. meeting public needs in times of tighter budgets, improving the business
environment by providing better services to business and citizens, and adapting
service provision to the needs of a more digital economy.

Several Member States are looking to make
efficiency gains in the organisation of their administrations, including by
improving cooperation between different layers of government. Some Member States
also have scope to strengthen the administrative capacity of the public
service, its professionalism and the quality of policy-making. Increasing the use of ICT and further deployment of e-government
services in Europe, such as e-procurement, can help to increase efficiency and
reduce costs in the order of 15-20%[20].
In this respect, the integration of the national points of
single contact, established as part of the Services Directive, into
e-government services is essential to cross-border cooperation. There is further scope to modernize tax collection and other
systems, for example by providing pre-filled tax forms, on line services and
"one time only" provision of data by citizens to the public sector.
Well-targeted financial support, in particular through the European Social Fund
and the European Regional Development Fund, can make a major contribution to
the modernisation of public administrations. At the same time, Member States
need to bolster the public investment capacity of national, regional and local
administrations to mobilise the ESIF programmes 2014-2020.

There is potential to simplify the business
environment, reduce red tape and improve the quality of legislation. There is also
a continued need to put in place lighter regulatory regimes, particularly for
SMEs. This includes reducing the complexity of setting up a business and the
length of permit and licensing requirements. Improving the
quality, independence and efficiency of judicial systems, including by ensuring
that claims are settled within a reasonable period of time and modernising
national insolvency legislation would considerably improve conditions for
firms.

At EU level,
simplification and streamlining of EU legislation is promoted through the
on-going regulatory fitness and performance programme (REFIT). Some important
progress has already been achieved. The Commission will publish an annual REFIT
scoreboard to track progress and facilitate dialogue on regulatory fitness with
Member States, business, social partners and civil society at large. In addition,
a smooth and consistent implementation of EU law, moving away from 28 solutions
to a common framework, will contribute to good cooperation among public
administrations and help make activities in the single market simpler and rules
more predictable.  More cooperation between tax
administrations is essential to fight against tax fraud and tax evasion.

The Commission
has identified the following priorities:

Further
deploying e-government services and increasing the use of ICT by public
administrations, including for tax collection systems, and for single market
points of contact of the Services Directive.

Simplifying
the business environment, reducing red tape through the introduction of lighter
processes and regulatory regimes.

8. 
Conclusion

Important progress has been achieved over
the last year in putting Europe back on track for a more sustainable recovery.
The integrity of the common currency was preserved, with greater financial
stability and decisive steps taken to put public finances in order. Countries
most exposed to financial vulnerabilities have been most engaged in initiating
ambitious structural reforms, with visible first results. Raising levels of
competitiveness and improving productivity to create sustainable jobs remain
clear priorities across Europe.

This Annual Growth Survey confirms that
far-reaching changes are taking place in Europe, more than is sometimes
perceived, and that the reforms which are underway are producing their effects.
Since its inception, the European Semester of economic policy coordination has
raised the sense of priority and transparency, and given focus to national and
European reform agendas. In a short time it has succeeded in laying the
groundwork for deeper co-ordination of economic policy between Member States.
The macro economic imbalances procedure is helping to identify economic
developments which are harmful for individual Member States or the Euro area so
that they can be tackled before they get out of hand. The annual country
specific recommendations identify the key areas where Member States need to
make changes accordingly.

It is also clear from experience to date
that national ownership of the process (and in particular of the country-specific
recommendations) needs to be developed further. This is important for the
democratic legitimacy of the new governance system as well as to ensure that EU
level policy elements are factored into national decision making at the right
time. The Euro area also needs to step up its co-ordination of certain key policy
areas and to move beyond assessing the bilateral recommendations to its
members. The European Council has scheduled a discussion on several of these
issues for its December 2013 meeting. Building on its EMU Blueprint and
subsequent communications the Commission will provide input on how to
strengthen further the European Semester process.

The guidance provided in this Annual Growth
Survey will be discussed at the EU level to prepare for the March 2014 European
Council and to help in the preparation of the next round of national programmes
and country-specific recommendations. The Commission will work closely with
national authorities, including national parliaments, other EU institutions,
social partners and stakeholders to create a shared sense of ownership and
steer progress as part of wider EU efforts to lay the foundations for smart,
sustainable and inclusive growth across the EU. The Commission invites the
European Parliament and the Council to endorse the priorities set out in this
Annual Growth Survey and to pursue their realisation at EU and national level.

Annex 1 - Overview of EU country-specific recommendations for
2013-2014

|| Public finances || Financial sector || Structural reforms || Employment and social policies

|| Sound public finances || Pension and healthcare systems || Fiscal framework || Taxation || Banking and access to finance || Housing market || Network industries || Competition in service sector || Public administration and smart regulation || R&D and innovation || Resource efficiency || Labour market participation || Active labour market policy || Wage setting mechanisms || Labour market segmentation || Education and training || Poverty and social inclusion

AT || || || || || || || || || || || || || || || || ||

BE || || || || || || || || || || || || || || || || ||

BG || || || || || || || || || || || || || || || || ||

CZ || || || || || || || || || || || || || || || || ||

DE || || || || || || || || || || || || || || || || ||

DK || || || ||   || ||   || || || || || || || || || || ||

EE || || || || || || || || || || || || || || || || ||

ES || || || || || || || || || || || || || || || || ||

FI || || || || || || || || || || || || || || || || ||

FR || || || || || || || || || || || || || || || || ||

HU || || || || || || || || || || || || || || || || ||

IT || || || || || || || || || || || || || || || || ||

LT || || || || || || || || || || || || || || || || ||

LU || || || || || || || || || || || || || || || || ||

LV || || || || || || || || || || || || || || || || ||

MT || || || || || || || || || || || || || || || || ||

NL || || || || || || || || || || || || || || || || ||

PL || || || || || || || || || || || || || || || || ||

RO || || || || || || || || || || || || || || || || ||

SE || || || || || || || || || || || || || || || || ||

SI || || || || || || || || || || || || || || || || ||

SK || || || || || || || || || || || || || || || || ||

UK || || || || || || || || || || || || || || || || ||

Note: Country specific recommendations for 2013-2014 adopted by the Council on 9 July 2013. Cyprus, Greece, Ireland and Portugal should implement commitments under EU/IMF financial assistance programmes. More information at: http://ec.europa.eu/europe2020/index_en.htm || ||

Annex 2 -
Progress in key areas of
the country-specific recommendations

This annex provides
a thematic overview of 3 years of experience of how Member States have
implemented the country-specific recommendations in key areas.

Overall, significant progress has been
made on fiscal consolidation in recent years, although the composition of the fiscal
adjustment has not always been growth-friendly.

- 
The fiscal adjustment in 2013 has been mainly
expenditure-based in IE, EL, LT and PL. Sizeable cuts in public investment
expenditure were done in PL and SK. Other countries have relied on a mix
of revenue-based and expenditure-based fiscal consolidation, such as in BE, ES,
IT, RO and SI. The adjustment has been mostly revenue-based in CZ, FR, LU, NL,
PT and FI.

- 
When consolidating their finances, Member States
have generally increased tax rates (standard VAT rates in particular) and not
many have broadened the bases. Environmental and property taxes have increased
but there is still room to make these taxes more efficient. All Member States
have adopted some measures to counter tax evasion and improve tax compliance.

- 
Many Member States have increased the overall
tax burden (direct and indirect taxes as well as social contributions). However,
it is positive to note that tax shifts are taking place to some extent, such as
reforms of property taxation and more emphasis on indirect taxes instead of
labour taxation.

- 
23 Member States have now legislated to increase
the pensionable age.[21]
In many cases, this is accompanied by an equalisation of pensionable ages for
men and women (CZ, EE, EL, HR, IT, LT, MT, PL, SI, SK, UK). Many Member States
have introduced an explicit and sustainable link between the pensionable age and
future gains in life expectancy (CY, DK, EL, IT, NL, SK). Most have also taken
steps to restrict access to early retirement, as well as to prolonged forms of unemployment
(e.g. ES) or invalidity benefits (e.g. AT, BE, BG, DK) which were used as
substitute for early retirement.

Difficulties in accessing finance
remain one of the main obstacles to growth, particularly for small and medium
sized enterprises (SMEs).

- 
Member States have adopted measures to combat
payment delays in order to alleviate businesses’ liquidity constraints. PT, EL,
ES and IT have all adopted plans to reduce the backlog from public
administrations and deal with the stock of arrears.

- 
Growing attention is paid to forms of loan
securitisation to unlock credit supply for SMEs, with ES as a good example. In
parallel, growing efforts are made to develop non-banking market-based
financing, such as the development of a corporate bond market in DK, EE, IT and
PT.

- 
Most Member States have put measures in place to
develop venture capital funds. CZ, DE and ES are launching new public venture
capital funds, while PT has consolidated existing funds to maximise their
impact. In addition, several Member States, including EE, NL, PL and ES, are
setting up ‘funds of funds’ to promote the emergence of a venture capital
market with numerous private funds.

- 
FR has announced a five-year tax relief for
equity investments in start-ups. A new programme was launched in DE to provide
private investors with additional financial incentives to invest in young and
innovative companies.

More needs be done in product and
services markets to boost the EU's growth potential.

- 
Some Member States have undertaken important
reforms to open their services sector and make it more effective, including PT,
ES, IT, EL, PL, SI and CZ. There is however important scope for reforms in
several Member States including in AT, BE, DE and FR, which have not fully
implemented their country-specific recommendations in this area and all need to
renew efforts under the Services Directive implementation.

- 
The sum of all public R&D budgets in the EU
decreased for the first time in 2011 since the beginning of the crisis, and is
now below the one of China. Over the last two years, some Member States made
significant efforts in favour of R&D (AT, BE, LU, HU, PL and SE), while
others reduced considerably their budgets (ES, IE, IT, MT and PT). Most Member
States have expanded or introduced new tax breaks for research and innovation
to stimulate private investment. The innovation gap is widening in Europe, with
SE, DE, DK and FI as the most innovative economies. A number of countries are
catching up (LV, SK, LT and EE) but others (UK, PL, CZ, HU, PT, RO, EL, BG, MT)
have lost ground in comparative terms since 2010.

- 
As regards energy markets, there are still 14
Member States lagging behind in the transposition of the third energy package.
Considerable investment is still needed in energy infrastructure across Europe,
but measures have been taken to improve interconnections both for gas and
electricity (e.g. electricity interconnections between PT and ES, the UK and IE
and in the Baltic region). Furthermore, in order to limit energy consumption
BG, CZ, EE, LT, LV, RO, SK are working on energy efficiency programmes which
could be financed by ETS revenues and ESIF.

- 
Obstacles to the development of the rail
services sector are noticeable in the following Member States: AT, BG, CZ, DE,
EL, ES, FR, HU, IE, LU, PL, PT, SI. They concern the separation of accounts
between infrastructure managers and railway undertakings, the use of track
access charges, and interoperability issues.

Important reforms are on-going in most
Member States to modernise labour markets.

- 
Top personal income rates are at their highest
level since 2008. The overall tax burden on labour has increased, but Member
States (BE, DK, FI, FR, HU, IT, NL, PT, SE) have decreased labour taxes for
specific groups. There is a tendency to increase progressivity.

- 
Countries with large imbalances have implemented
far-reaching reforms in their wage-bargaining system to allow for greater
flexibility in wage adjustment. Over 2007-2012, the fall in unit labour costs
compared with competitors has been significant for countries such as IE, EL, ES
and PT. On-going reforms, notably of wage setting mechanisms, are expected to further
support the adjustment process in countries such as EL and ES.

- 
ES, IT and FR undertook reforms to modernise
their employment protection legislation and combat the segmentation of their labour
market. Significant reforms are also initiated or considered in LT, NL, PL and
SI.

- 
A number of Member States have reinforced and
better targeted their ALMP measures and improved public employment services
(BG, DE, EE, IE, EL, IT, LT, LU, SK, FI, SE, UK).

- 
Action is being stepped up to combat youth
unemployment, including through the establishment of Youth Guarantees. Overall
investment in education and training has diminished during the crisis in
particular in BG, EL, IT, SK and RO. The modernisation of education and
training systems remains an urgent priority in many Member States. Some (CZ,
SK, UK) are developing the use of innovative performance based funding models
in higher education.

- 
The development of high-quality apprenticeships
and dual vocational training is a priority in many countries (EL, ES, IT, LV,
PT, SK). Several countries have initiated reforms to reduce school drop-outs
and to adapt higher education curriculae to labour market needs (AT, IT, PL).
In the light of increasing unemployment, notably long-term, most Member States
report measures to increase participation in life-long learning.

- 
In their efforts to address poverty, a number of
countries are introducing or strengthening activation measures and reforming
their social assistance systems (LT, CY, DK, EL, HR, IT, PL and RO).

Overall, the business environment is
still lagging behind that of our global competitors.

- 
Relative weaknesses differ widely across
countries. Starting up a business is easy in Ireland and the UK, but enforcing
contracts less so. Compared to other Member States, the time needed to resolve
insolvency is relatively low in IE, BE, FI, DK, UK, AU, NL and DE, but the
protection of investors is considered weaker in some cases. In FR, ES and LU,
obtaining a construction permit is cumbersome, and in ES and LU start-up conditions
are complex. Enforcing a contract in IT, EL, MT, CY and SI is still considered costly
and time-consuming.

- 
According to the recent EU competitiveness
report, based on a series of indicators, moderate performers and countries
lagging behind have been improving their business environment most
significantly since 2007, while leading countries have slid down in the
ranking, or have improved only marginally. This means that in spite of
considerable differences remaining, an overall catching up in performance and
practices is taking place across the EU.

[1]     Annex 1 provides an overview of country-specific
recommendations adopted by the EU in July 2013. 
More information is available at: http://ec.europa.eu/europe2020/index_en.htm

[2]     http://ec.europa.eu/economy_finance/eu/forecasts/2013_autumn_forecast_en.htm

[3]     COM(2013)790.

[4]    Draft Joint Employment Report, COM(2013) 801.

[5]     COM(2012)777.

[6]    http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/134069.pdf

[7]     COM(2013)690.

[8]    COM(2013)166.

[9]    COM(2013)165.

[10]  COM(2012)777.

[11]  COM(2013)165.

[12]  European Central Bank (2013), ‘Report on the results of the survey
on the access to finance of SMEs in the euro area - October 2012 to March
2013’.

[13]   Cf. Directive 2013/36/EU and Regulation (EU) No 575/2013 OJ L
176, 27.6.2013.

[14]    A number of recent or forthcoming EU
legislative measures will also help SMEs gain access to sources of funding
across Europe: the Regulation on ‘European Venture Capital Funds’, which is in
force since July 2013, will facilitate cross-border fundraising and the
creation of a genuine internal market for venture capital funds; the proposed
Markets in Financial Instruments Directive (MiFiD), which should help the
development of stock markets specialised in SMEs, and the proposal for a
modification of the Transparency Directive, which will give better information
on listed companies, will make SMEs more attractive to investors; the migration
to the Single Euro Payments Area (SEPA) by 1 February 2014, which should cover
most credit transfers and direct debits, will improve the efficiency of payment
systems within the Euro area.

[15]  These issues are covered in the relevant
country-specific recommendations and where appropriate in the Alert Mechanism
Report.

[16]    Detailed proposals were made by the Commission in its Green
Paper on the long-term financing of the European economy (COM(2013)150 of 25
March 2013).

[17] See the Commission Proposal for a General Data Protection
Regulation, COM(2012) 11.

[18]    See more information in the Single Market Report published
alongside this Annual Growth Survey.

[19] Currently, there are about 1,9 million job vacancies in the EU.

[20]    Public Services Online, e-gov benchmark insight report for the
European Commission.

[21] For an overview of the pensionable age across the EU see COM(2013)
350.